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I confess that I have not been following the saga of so-called “black liquor” (no, nothing to do with Johnny Walker Black, which was my initial thought, but perhaps that’s just me), but over at Dead Tree Edition, our friend Mr. Tree (if that is his name) has been tracking the various boondoggles—and it sounds like he could use a few belts of said Johnny Walker Black right about now.

Here’s the saga in a nutshell:

So-called black liquor is the sludge—“spent cooking liquor” is the more or less official term for it—that is generated during the “kraft” paper pulping process. Kraft pulp—generated through a chemical process—is used to make high-brightness papers like copy paper, high-end coated paper, and other freesheets, as well as certain packaging materials. Other pulping processes, such as mechanical, that are used to make newsprint or “fluff” pulp that goes into tissue, don’t generate black liquor.

But more than simply useless muck, black liquor is actually a valuable fuel source, and is reused by paper companies to help generate power for the mill. This is nothing new; paper mills have been burning black liquor since the 1930s.

Flash forward. The 2005 highway bill contained an alternative fuels tax credit, which was designed to encourage the use of biofuels in cars and trucks. Here is where the Law of Unintended Consequences comes in.

By 2009, the economy had cratered and many companies were in the red. Meanwhile, the IRS said that by burning black liquor (with just a dash of diesel—the idea was to get companies that used diesel to add some biofuel, but the opposite actually happened), paper companies could qualify for a 50-cent-a-gallon alternative fuel mixture tax credit.

Tax credits by design reduce the amount of taxes that companies and individuals remit to the government. However, when companies owe little or no taxes (i.e., they are not making money) these tax credits become tax refunds, meaning that troubled companies could now get cash back from the government. And when you read the phrase “troubled companies,” you would not be wrong to immediately think of the paper industry.

So the Treasury ended up paying $8 billion to paper companies. Well, what was reported to the SEC was $8 billion, but more than one-fourth of the companies involves in kraft pulp production are private companies that don’t have to report to the SEC. So the real total is more along the lines of $10–11 billion.

The Washington Post’s Steven Mufson has written extensively about the black liquor quagmire, and following what was essentially a federal bailout of the paper industry, folks in Congress were none too happy about it. But, it was a moot point, as the black liquor credit legislation expired at the end of 2009.

Or was it a moot point?

Wrote Mufson:

The IRS in 2010 ruled that black liquor could also qualify retroactively for advanced cellulosic biofuel credits, which were intended to reward innovation in the production of alternative motor fuels. The credit was worth $1.01 a gallon under the 2008 farm bill, but was not refundable and, therefore, only useful for profitable companies. So companies often used a combination of the two tax credits to revise earlier tax returns and maximize income.

These new tax credits are what Mr. Tree calls “The Son of Black Liquor” tax credits. So, the government freaked again, and legislation again ended the application of the cellulosic biofuel credits to black liquor. So, again, it became a moot point.

Or did it?

The new twist — largely unnoticed — came in 2011. After the congressional uproar subsided, most paper companies amended their 2009 tax returns to gain further advantage. Initially, paper companies had told shareholders in 2009 and 2010 that the refundable alternative fuel credits would be taxed. But in 2011, they quietly declared that the money shouldn’t be taxed. The Treasury ended up refunding about $2 billion in taxes the companies had paid, according to industry experts.

Since then, inaction and questionable rulings from the IRS (and lobbying from the paper industry) have been a boon to paper companies. Says Mr. Tree:

Paper companies have not been able to use all their credits yet, but when all is said and done the tab will probably be several billion dollars.

He further added, in an e-mail to me:

Companies have several years to use their Son of Black Liquor credits, but as you note they can’t use those credits unless they have income taxes to offset. Some have indicated they will continue repaying their Alternative Fuel Mixture credits to claim the larger Cellulosic Biofuel Producer credits for the next few years, as the opportunity presents itself.

3 Responses to “The Red and the Black”

Imagine if that windfall from taxpayers had been invested in energy efficiency upgrades and other modernization……yes, it temporarily kept some mills open that were on the brink….but imagine what that would have done for preserving the jobs of mill workers in the US for the long term. Instead it really just went to pockets of shareholders….

Well, it was completely legal that the paper companies took advantage of the tax credit. Let’s not blame the paper companies for applying for the credit. If you want to place blame, pour it on the senators, representatives and lobbyists from the corn producing states and companies who think we can grow our fuel, economically. It is only profitable for the ethanol companies when they get the government subsidies. Yes, it was unintended consequences.

Canada followed suit with their own black liquor tax credit to help level the playing field for Canadian mills. But, in the following year they were much smarter by offering the same total credit value, but requiring the money to be spent on environmentally friendly or energy efficiency measures to be implemented before receiving the funds. This was called the Green Transformation Fund and the rules only filled two pages.

I thought the alternative fuels tax credits were intended to be given to companies who discovered or invented new alternative fuels? It would be interesting to track the exchange of dollars received to see if any of that money ended up in the back pockets of our glorious senator’s in Washington?

Black liquor is also a bi-product of the sulphite pulping process to make pulp from hardwood deciduous trees. Wooden chips, the size of a postage stamp, are poured into pulp digesters. Chemicals are added to the chips and the digesters are sealed. Heat is introduced and the cooking liquor boils, similar to a giant pressure cooker. The cooking liquor dissolves the lignin, tannins, and resins (the cementing agents in wood) to form individual fibers to be used in the paper making process. Fibers are sent on to be bleached to a higher whiteness and brightness used to make higher quality papers.

After the digester has finished the cook, the cooking liquor is drained from the digester and is sent to be filtered and reprocessed. Most of it is recycled and used again for the next batch of pulp. The remaining material, also known as black liquor, contains higher concentrations of lignins, tannins and resins. They take this black liquor and fortify it with diesel fuel and spray this mixture into their boilers to generate steam to drive the turbine powered paper machines and to heat the driers on the paper machine.

Doug, as you mentioned, why did the federal government allow the paper industry to receive alternative fuel tax credits for a process they have been using since the 1930’s? The real question is, where were the American tax payers like you and I when they found about what the paper industry was doing to add to our federal deficit?

Revenues received by American paper manufactures were just a temporary fix. It is already too late. US paper manufactured dominated the global paper market. Instead of reinvesting their capital to upgrade their paper machines, pulping facilities and technologies, they decided to use their profits to pay for inflated labor rates supported by the unions and to satisfy their stock holders. In the meantime, Asian paper manufactures began to build the world’s largest and fastest paper machines as well as state of the art pulping facilities. They knew the only way to capture the global paper market was to control their cost per unit. In the meantime, US paper manufactures continued to put their heads in the sand and allow the rest of the world to pass them by.

Perhaps there will be a day when Americans have had enough and gather by the millions in Washington to demonstrate. I think a great slogan for a demonstration like this would be to title it, “WE WANT OUR COUNTRY BACK.!

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About Going Green

Going Green contains stories, reports, commentary, and interviews that highlight how a company can reduce its environmental footprint and become more sustainable.

Managing Editor Richard Romano is a writer and analyst for the graphic communications industry and frequently contributes feature articles, news stories, and special research reports to WhatTheyThink, the leading news and information portal for the graphic communications industry.